Midterm 2

Question 1

Savings (National)
(Calculation)

Answer 1

Y-C-G

Question 2

Savings (Private)
(Calculation)

Answer 2

Y-T-C or I + Government Deficit Budget

Question 3

S (Public)/Government
(Calculation)

Answer 3

T-G

Question 4

Net Taxes
(Calculation)

Answer 4

Total taxes - transfer payments - interest

Question 5

Net Capital Inflow
(Calculation)

Answer 5

Export - Import or Import - Savings (National)

Question 6

Why do people save?

Answer 6

Life cyle saving
Precautionary Saving
Bequest saving (Inheritance)

Question 7

Real Interest Rate formula (Fisher’s Equation)

Answer 7

r = R - π

r - Real interest rate
R - Nominal interest rate
π - Inflation rate

Question 8

Fisher Effect

Answer 8

Increase in inflation, increase in nominal interest rate by the same amount

Question 9

3 Tasks of Financial System

Answer 9

Reduce transaction cost
Reduce risk
Liquidity

Question 10

4 Types of financial assets

Answer 10

Loans
Bonds
Loan Backed Securities
Stocks

Question 11

Financial Asset

Answer 11

Paper claim that entitles the buyer to future income

Question 12

Physical Asset

Answer 12

Tangible object used to make future income

Question 13

Liability

Answer 13

Requirement to pay income in the future

Question 14

Net worth
(Calculation)

Answer 14

Assets - Liability

Question 15

Flow

Answer 15

Measure per unit of time (saving)

Question 16

Stock

Answer 16

Defined point in time (wealth)

Question 17

Capital Gain

Answer 17

Asset increased in value

Question 18

Capital Loss

Answer 18

Asset decreased in value

Question 19

What is asset price determined by?

Answer 19

Fundamentals
Future Expectations

Question 20

Currency in circulation

Answer 20

Cash held by the public

Question 21

Checkable bank deposits

Answer 21

Bank account which people write cheques

Question 22

Money Supply

Answer 22

Total value of financial assets in economy that are money

Question 23

Uses of Money

Answer 23

Store of value
Medium of exchange
Unit of account

Question 24

Types of money

Answer 24

Commodity money
Commodity-backed money
Fiat money

Question 25

M1 (Calculation)

Answer 25

Currency + Checkable deposits

Question 26

M2 (Calculation)

Answer 26

M1 + Savings and term deposits (that can be easily converted to M1)

Question 27

Functions of central bank

Answer 27

Banker for commercial banks Banker for federal government Issues currency Conducts monetary policy

Question 28

Tools to control money supply

Answer 28

Reserve requirements Bank interest rate Open-Market operations Government deposit switching

Question 29

Overnight funds market

Answer 29

Market where banks lend each other money overnight

Question 30

Bank Rate

Answer 30

Central Bank has reserve requirement When cheques are cleared, banks gain or lose deposits. If bank doesn't have enough, it borrows money from other banks in overnight funds market.

Question 31

Open Market Operation

Answer 31

Monetary policy used by central bank to control money supply. They deal with T-bills

Question 32

Open Market Purchase

Answer 32

Central Bank buys T-bills from commercial banks. Done during recession or to add money supply

Question 33

Open Market Sale

Answer 33

Central Bank sells T-bills to commercial banks. Usually done when they want to lessen money in circulation.

Question 34

Quantity Theory of Money (Calculation)

Answer 34

M * V = P * Y M - Money supply V - # of times money is used P - Price level Y - Real output

Question 35

Inflation (In respect to Quantity theory of money)

Answer 35

Money Supply growth rate (%M) - Real output growth rate (%Y)

Question 36

Reserve Ratio

Answer 36

Portion of deposit bank keeps kept amount/total

Question 37

Multiplier (Formula)

Answer 37

1/(1-MPC)

Question 38

Consumption Function

Answer 38

c = a + MPC*yd c - consumption a - fixed spending MPC - marginal propensity to consume y - household disposable income

Question 39

Investment Spending Dependencies

Answer 39

Interest rate Future expectation of GDP Current production capacity Accelerator principle

Question 40

Aggregate Expenditure (Calculation)

Answer 40

C + I(Planned)

Question 41

GDP (in terms of investment)

Answer 41

C + I(Total)

Question 42

Equilibrium for Investment

Answer 42

GDP = AAggregate Expenditure

Question 43

What does it mean if I (Unplanned) is negative?

Answer 43

That means demand was greater than the planned inventory they had. (Sales are higher than expected)

Question 44

Bubble price meaning

Answer 44

Price increases due to unrealistic expectations for an asset